econ 202 test 2

Δ Government expenditure needed to close the output gap.

output gap/multiplier

Under the Soviet system of communism,

technological progress was slow because managers had little incentive to develop new technologies.

actual investment will equal to plan investment when...

there is no unplanned change in inventories

U.S. net export spending rises when

The growth rate of U.S. GDP is slower than the growth rate of GDP in other countries

f the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve?

This will shift the aggregate demand curve to the right.

5 variables that determine the level of consumption

current disposable income, household wealth, expected future income, the price level, and interest rate

when AE is greater than GDP, inventories will ______ and GDP and total employment will ______

decline, increase

if the economy is to the left of the AD line on a graph, the appropriate fiscal policy by the Federal Reserve would be to

decrease income taxes

aggregate expenditure model =

focuses on the short run relationship between total spending and real GDP. In any particular year, the level of GDP is mainly determined by the level of aggregate expenditure

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by

he level of aggregate expenditure

MS x V = P x Y

money supply x velocity = real GDP x price level

Consumption spending is $5 million, planned investment spending is $8 million, actual investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is the Aggregate Expenditure for this economy?

$25 million

f the bank of Waterloo receives a $10,000 deposit, and the reserve requirement is 10 percent, how much can the bank loan out? (Assume that before the deposit this bank is just meeting its legal reserve requirement.)

$9,000

If investment in an economy increases by $20 million and subsequently equilibrium GDP only increases by $5 million, the multiplier for this economy is __________.

0.25

multiplier

1/1-mpc

________________ in taxes will increase consumption spending, and ___________ in transfer payments will increase consumption spending.

A decrease; an increase

The formula for aggregate expenditure is

AE = C + I + G + NX

macroeconomic equilibrium:

AE=GDP

When the government runs a budget deficit, we would expect to see that

According to the quantity theory of money, (holding velocity constant) deflation will occur if the

he Soviet Union's economy grew rapidly in terms of GDP per hour worked in the 1950s, but eventually this growth slowed. Why did this occur?

Capital per hour worked grew rapidly from 1950 to 1980, but technological change occurred very slowly.

Which of the following is one explanation as to why the aggregate demand curve slopes downward?

Decreases in the price level raise real wealth and increase consumption spending

An increase in aggregate expenditure has what result on equilibrium GDP?

Equilibrium GDP rises

If the Fed buys U.S. Treasury securities, then this

Increases reserves, encourages banks to make more loans, and increases the money supply.

f an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then

MPC is 0.875

As the economy nears the end of an expansion, which of the following do we typically see?

Rising interest rates

Contractionary fiscal policy will

Shift the aggregate demand curve to the left

Expansionary fiscal policy will

Shift the aggregate demand curve to the right

f government saving is negative, then

T- Tr < G

f there is an increase of $50 million as a result of an increase in autonomous consumption spending of $10 million, then the MPC is

The MPC is 0.8

Which of the following would cause the money demand curve to shift to the left?

a decrease in real GDP

Which of the following is not one of the three sources of technological change?

additional amounts of existing capital

Firms in a small economy planned that inventories would grow over the past year by $300,000. Over that year, inventories actually grew by $400,000. This implies that

aggregate expenditure that year was less than GDP that year.

Which of the following will shift the aggregate demand curve to the left?

an increase in the interest rate

In the basic aggregate demand - aggregate supply model, a decrease in the price of oil will in the short run lead to ____________ in the employment rate and ____________ in the price level.

an increase; a decrease

n the basic aggregate demand - aggregate supply model, an increase in the price of oil will in the short run lead to ____________ in the UNEMPLOYMENT RATE and ____________ in the price level.

an increase; an increase

You are an economic advisor to the president. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose?

an investment tax credit

why is the SRAS curve upward sloping?

bc input prices are sticky, meaning they don't change as quickly as final good prices

in a recessionary gap:

buy bonds, decrease R, decrease DLR > increases money supply -> decrease interest rate >increase C, I, NX > increase in GDP

consumption =

c+mpc(y-t) type of consumption (coming from your wealth) + marginal propensity to consumer (what portion of your disposable income are you spending) (disposable income - sales tax)

Silver is an example of a

commodity money.

in a recessionary gap the level of inflation is likely to _____ due to the _____ levels of spending, output and unemployment ( _____ the natural rate of unemployment)

decrease, decrease, higher vice versa for expansionary

Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish kronor to purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the United States to Sweden and ________ U.S. aggregate demand.

decrease; decrease

An increase in interest rates

decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports.

A bank is legally required to hold a fraction of its ____________ as ____________.

deposits, required reserves

short run aggregate supply (SRAS) :

describes relationship between the price level and the quantity of goods firms are willing to supply

When additions of input to a fixed quantity of another input lead to progressively smaller increases in output, we say we are facing

diminishing returns.

Technological improvements are more likely to occur if

entrepreneurs are compensated with higher profits for taking risks.

Expansionary monetary policy refers to the ________ to increase real GDP.

federal Reserve's increasing the money supply and decreasing interest rates

when AE is less than GDP, inventories will ____ and GDP and and total employment will

increase, decrease

Foreign direct investment declined worldwide during the recession of 2007-2009. The decline in foreign direct investment in developing countries can make it more difficult for these countries to break out of the vicious cycle of low economic growth and

low saving and investment.

If the probability of losing your job remains ________, a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time.

low; lowers

our roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Fed can affect the economy through monetary policy? Increasing the money supply

lowers the interest rate, and firms increase investment spending.

he quantity theory of money seeks to explain the connection between price levels and

money

in an expansionary gap:

sell bonds, increase R, increase DLR > decrease money supply-> interest rate > decrease C, I , NX > decreases GDP

The Fed can increase the federal funds rate by

selling Treasury bills, which decreases bank reserves

aggregate expenditure =

total spending in the econonmy

taxes needed to close the gap

Δ Consumer expenditure needed to close the output gap /MPC